09/16/2012

This report draws upon information in the Proxy Monitor database to assess the 2012 proxy season in historical context. Among its key findings:

A small group of shareholders continue to sponsor the overwhelming majority of shareholder proposals. In 2012, 36 percent of all such proposals were sponsored by labor-union pension funds; 31 percent were sponsored by three individual investors and their relatives and family trusts; and 22 percent were sponsored by investors with a “socially responsible” investing purpose or express religious or public policy purpose. Only 10 percent of shareholder proposals were sponsored by individuals other than the three “corporate gadflies,” and only 1 percent by institutional investors unaffiliated with organized labor or a social, religious, or public policy purpose.

Public-employee pension funds played a heightened role in the 2012 proxy season, sponsoring 38 percent of all labor-backed proposals, as compared with 26 percent in the entire 2006–12 period.

Religious-affiliated investors were far less active in the 2012 proxy season: proposals backed by religious investors constituted only 15 percent of all proposals backed by social, religious, or policy groups, as compared with 42 percent in the full 2006–12 period. Notably, Catholic orders of nuns sponsored only two proposals at Fortune 200 companies in 2012, as compared with 11 in 2011 and 16 to 19 annually between 2006 and 2012.

Shareholder proposals related to corporations’ political spending grew in number in 2012 but gained little traction. Proposals seeking to increase the disclosure of or to limit companies’ lobbying or spending on political purposes constituted a plurality of all proposals in 2012 and 45 percent of proposals with a social or policy-related purpose. The number of such proposals submitted per company in the Fortune 200 was 20 percent higher than in 2011, double that in 2010, and more than three times that in 2008. However, only 17 percent of shareholders, on average, supported these proposals in 2012, down from 22 percent in 2011 and lower than any other year in the 2006–12 period.

Labor-union pension funds’ sponsorship of shareholder proposals appears to be unrelated to shareholder return and connected to union-organizing activities and other labor objectives. As is the case across the full 2006–12 period, labor pension funds’ shareholder proposals are concentrated in companies and industrial sectors targeted by union-organizing campaigns. Each of the companies facing more than two labor-sponsored shareholder proposals in 2012 had share returns that outperformed its peer group in 2011; each company, however, had been engaged in public disputes with labor unions or had played an active role in the political process against organized labor’s interests.

The number of shareholder proposals receiving majority support fell in 2012, but this shift appears to be attributable to the types of proposals being introduced rather than a broader trend. Only 6 percent of shareholder proposals received majority backing at Fortune 200 companies in 2012, down from 7 percent in 2011, and below every other year in the full 2006–12 period. The average shareholder vote in 2012, however, was 25 percent, in line with the 2006–12 average. Econometric analysis of Proxy Monitor data shows that there is no statistically significant difference between 2012 shareholder voting and other years; the decrease in voting this year instead appears to be attributable mostly to shifts in the composition of shareholder proposals.

The recommendations of the proxy advisory firm ISS significantly influence shareholder voting, though the firm’s recommendations are systematically more inclined to favor such proposals than are the majority of shareholders. The proxy advisory firm Institutional Shareholder Services (ISS) makes recommendations to institutional investors on shareholder voting and has a dominant market share position (61 percent). Econometric analysis of Proxy Monitor data shows that a positive recommendation from ISS increases voting support for a shareholder proposal by 15 percent, controlling for other factors. However, ISS consistently supports a much higher share of shareholder proposals (63 percent) than do shareholders overall (less than 8 percent).

Overall, empirical analysis of Proxy Monitor data, in 2012 and across the 2006–12 time span, challenges the efficacy of the shareholder-proposal process, at least from the perspective of the ordinary investor. The prominent role being played by a small number of investors, most prominently labor-union pension funds whose actions in this area appear to deviate from concern over share value, suggests that this process may be oriented toward influencing corporate behavior in a manner that generates private returns to a subset of investors while harming the average diversified investor. The significant influence of the proxy advisory firm ISS, along with its substantial deviation from shareholders’ observed preferences, amplifies concerns about whether shareholder voting on proxy ballot items is effectively working to improve share value.

Comments

This report draws upon information in the Proxy Monitor database to assess the 2012 proxy season in historical context. Among its key findings:

A small group of shareholders continue to sponsor the overwhelming majority of shareholder proposals. In 2012, 36 percent of all such proposals were sponsored by labor-union pension funds; 31 percent were sponsored by three individual investors and their relatives and family trusts; and 22 percent were sponsored by investors with a “socially responsible” investing purpose or express religious or public policy purpose. Only 10 percent of shareholder proposals were sponsored by individuals other than the three “corporate gadflies,” and only 1 percent by institutional investors unaffiliated with organized labor or a social, religious, or public policy purpose.

Public-employee pension funds played a heightened role in the 2012 proxy season, sponsoring 38 percent of all labor-backed proposals, as compared with 26 percent in the entire 2006–12 period.

Religious-affiliated investors were far less active in the 2012 proxy season: proposals backed by religious investors constituted only 15 percent of all proposals backed by social, religious, or policy groups, as compared with 42 percent in the full 2006–12 period. Notably, Catholic orders of nuns sponsored only two proposals at Fortune 200 companies in 2012, as compared with 11 in 2011 and 16 to 19 annually between 2006 and 2012.

Shareholder proposals related to corporations’ political spending grew in number in 2012 but gained little traction. Proposals seeking to increase the disclosure of or to limit companies’ lobbying or spending on political purposes constituted a plurality of all proposals in 2012 and 45 percent of proposals with a social or policy-related purpose. The number of such proposals submitted per company in the Fortune 200 was 20 percent higher than in 2011, double that in 2010, and more than three times that in 2008. However, only 17 percent of shareholders, on average, supported these proposals in 2012, down from 22 percent in 2011 and lower than any other year in the 2006–12 period.

Labor-union pension funds’ sponsorship of shareholder proposals appears to be unrelated to shareholder return and connected to union-organizing activities and other labor objectives. As is the case across the full 2006–12 period, labor pension funds’ shareholder proposals are concentrated in companies and industrial sectors targeted by union-organizing campaigns. Each of the companies facing more than two labor-sponsored shareholder proposals in 2012 had share returns that outperformed its peer group in 2011; each company, however, had been engaged in public disputes with labor unions or had played an active role in the political process against organized labor’s interests.

The number of shareholder proposals receiving majority support fell in 2012, but this shift appears to be attributable to the types of proposals being introduced rather than a broader trend. Only 6 percent of shareholder proposals received majority backing at Fortune 200 companies in 2012, down from 7 percent in 2011, and below every other year in the full 2006–12 period. The average shareholder vote in 2012, however, was 25 percent, in line with the 2006–12 average. Econometric analysis of Proxy Monitor data shows that there is no statistically significant difference between 2012 shareholder voting and other years; the decrease in voting this year instead appears to be attributable mostly to shifts in the composition of shareholder proposals.

The recommendations of the proxy advisory firm ISS significantly influence shareholder voting, though the firm’s recommendations are systematically more inclined to favor such proposals than are the majority of shareholders. The proxy advisory firm Institutional Shareholder Services (ISS) makes recommendations to institutional investors on shareholder voting and has a dominant market share position (61 percent). Econometric analysis of Proxy Monitor data shows that a positive recommendation from ISS increases voting support for a shareholder proposal by 15 percent, controlling for other factors. However, ISS consistently supports a much higher share of shareholder proposals (63 percent) than do shareholders overall (less than 8 percent).

Overall, empirical analysis of Proxy Monitor data, in 2012 and across the 2006–12 time span, challenges the efficacy of the shareholder-proposal process, at least from the perspective of the ordinary investor. The prominent role being played by a small number of investors, most prominently labor-union pension funds whose actions in this area appear to deviate from concern over share value, suggests that this process may be oriented toward influencing corporate behavior in a manner that generates private returns to a subset of investors while harming the average diversified investor. The significant influence of the proxy advisory firm ISS, along with its substantial deviation from shareholders’ observed preferences, amplifies concerns about whether shareholder voting on proxy ballot items is effectively working to improve share value.